The 'Walmart 200' & Beyond

Murphy USA's five key strategies for growth

EL DORADO, Ark. -- High-volume fuel retailer
Murphy USA Inc. still sees plenty of opportunity in its long-term partnership with Wal-Mart Stores Inc., as well as in expanding beyond the small-kiosk, tobacco-centered model, president and CEO Andrew Clyde told analysts April 15 at its first analysts day event, presenting the company's plan for growth in the coming years following its recent spinoff from Murphy Oil Corp.

Clyde outlined five key strategies for Murphy USA:

1. Grow organically. El Dorado, Ark.-based Murphy USA, which forged its fuel partnership with Wal-Mart in 1996, looks to build on the relationship. It typically acquires the land under the fueling sites it builds in the parking lot of Walmart stores, with the most recent parcel of 200 locations bought in 2012. It has targeted this "Walmart 200" for continued development over the next three years.

It is also maintaining its own Murphy Express locations, which are situated near Walmart sites with parking lots that for either space or ownership reasons cannot be developed.

At year-end 2013, Murphy USA had 1,021 sites on Walmart pads and 182 Murphy Express locations. Most of its small-format sites--or 1,087--are located near Walmart Supercenters in the Southwest, Southeast and Midwest. Another 31 small-formats are located at Walmart Neighborhood Markets, the retailer's smaller, grocery-focused model.

Murphy USA also has 85 larger-format, standalone Murphy Express locations built since 2005 that are between 2,000 and 3,500 square feet.

"We're continuing to build a handful of those larger-format sites each year," Clyde said. "It is just another means for growth where we can invest in the larger-format stores in very selective markets and [it] provides a good way to test product and have some alternative growth."

Beyond the Walmart 200, Murphy USA still sees "theoretical opportunity" at the more than 1,200 Walmart Supercenters not in its core markets. While some may not have space for gasoline, the network overall is a likely setting of growth for the partnership.

"It fits our strategy," said Clyde. "We know what the economics and returns are for those."

2. Diversify merchandise mix. Murphy USA has also trended away from the small, 270-square-feet-and-under kiosk locations with an outdoor "snack alley" toward larger, 1,200-square-foot boxes on the Walmart sites. This is not only to improve the customer experience, but also to diversify more away from tobacco. The retailer has 38 of these locations, which pull in an average volume of 315,533 gallons per site per month versus 274,232 gallons per site per month at the smaller locations. Average monthly merchandise sales are $174,900 per site versus $134,400 at the kiosks.

"So you can see the added benefit of the merchandise, increased beverage sales, increased salty snacks, the ability to have a limited coffee and fountain offer in a more conducive environment to our consumer," said Clyde.

But don't expect Murphy USA to expand to truly large-format locations at Walmart sites. "We believe we can get superior returns through our lean, low-cost operating model at 1,200 square feet versus going all the way to a 5,000-square-foot store, which you wouldn't put in front of Walmart because you would find yourself competing with Walmart," said Clyde.

Employees will also be focused on upselling, competing for the most sales to win a companywide contest. This is important because Murphy USA has seen a falloff in cigarette sales, which peaked in 2011 and have declined 4% to 5% per year. Feeding into this: price competition from new market entrants and the growth of electronic cigarettes and vaping products.

Murphy USA also tested several promotions in 2013, including one that discounted gasoline by 10 cents per gallon after the purchase of three 20-ounce Coca-Cola, PepsiCo and Monster packaged beverages. During the promotional period, it grew 20-ounce beverage sales by 42%. And while the industry was seeing flat growth in carbonated soft drinks, Murphy USA enjoyed 4.5% growth. In 2014, the promotion will expand to more brands, including Dr Pepper, Nestle Waters Pure Life, Frito-Lay's Doritos and e-cigarettes.

3. Sustain a cost leadership position. Murphy USA has been aggressive with controlling costs so that it can maintain its own low-cost position.

"There are going to be ruthless competitors like Murphy USA out there who can hold their cost in line with inflation and you have got to be prepared in this industry to survive on flat nominal field margins which therefore decline in real terms," said Clyde.

The retailer held costs flat in 2012 and actually bested the industry average in 2013. For example: Preliminary NACS State of the Industry figures show wages and benefits costs up 3.4% for the industry in 2013; Murphy USA saw a 2.1% increase, holding it at inflation. While industry utility costs rose 3.1%, Murphy USA's fell 1.6% because of energy monitoring technology and keeping on top of repairs.

4. Take advantage of market volatility. Murphy USA sites averaged 268,000 gallons per month in 2013, which Clyde said was two to four times the volume of its competitors; however, it was doing so at a lower, 13-cent-per-gallon unit margin.

"I would much rather sell three to four times the volume at a 13-cent margin than a third or a quarter of the volume at 16 cents," he said. This is because it generates higher fuel gross-margin dollars per site.

Murphy USA had expected volumes to level out in 2013 at 275,000 gallons. Indeed, the company expects demand to remain flat because of increasing fuel efficiency and the sluggish economic recovery. The decline it saw from 2012 to 2013 instead shows how aggressive the retailer must be with fuel prices.

"If you buy gasoline from a supermarket or a mass merchant, that customer is even more price-sensitive and even more promotion-sensitive," said Clyde. "And so you have got to be low cost on fuel."

The retailer has invested in its fuel supply chain to keep costs low, and takes advantage of any volatility to make up margin dollars on wholesale price drops.

"Our goal is to secure product prices that are equivalent to the low rack price or better," he said.

5. Invest for the long term. Murphy USA has three thrusts at long-term investment, including maintaining a low cash breakeven for fuel; de-levering and keeping a conservative balance sheet to help fund organic growth and continually improve existing sites; and returning extra cash from above-cycle profits to its shareholders

When asked by an analyst whether Murphy USA would veer from its organic growth model and consider an acquisition, Clyde was noncommittal. "I have learned to say never say never," he said, adding that it would depend on whether it ran out of opportunities to grow with Walmart; however, he said for now, Murphy USA has found a partnership and model that works.

"It's a lot different to say I'm going to buy the Hess network, versus having them spin off and believe we can add value above what they would get from spinning off or someone like a Couche-Tard acquiring them," said Clyde. "So I think we're very focused on the capabilities we're good at."

Plunge in oil prices sets the stage for record margins and boost in in-store sales. Also In This Issue: Profitability skyrockets for top performers! Other channels seek to redefine convenience! The economy enters a new stage. The growing health-and-wellness trend. Fuel demand; oil's slide; multicultural momentum; and data, data, data!

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